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Sense and Sensitivity: An Input Space Odyssey for Asset-Backed Security Ratings

Author

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  • Francesca Di Girolamo
  • Henrik Jonsson
  • Francesca Campolongo
  • Wim Schoutens

Abstract

The rating of asset-backed securities is partly based on quantitative models for the defaults and prepayments of the assets in the pool. This quantitative approach contains a number of assumptions and estimations of input variables whose values are affected by uncertainty. The uncertainty in these variables propagates through the model and produces uncertainty in the ratings. The objectives of this paper are twofold. Firstly, we advocate the use of uncertainty and sensitivity analysis techniques to enhance the understanding of the variability of the ratings due to the uncertainty in the inputs used in the model. Secondly, we propose a novel rating approach called global rating, that takes this uncertainty in the output into account when assigning ratings to tranches.

Suggested Citation

  • Francesca Di Girolamo & Henrik Jonsson & Francesca Campolongo & Wim Schoutens, 2012. "Sense and Sensitivity: An Input Space Odyssey for Asset-Backed Security Ratings," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(4), pages 46-68, October.
    • Handle: RePEc:jfr:ijfr11:v:3:y:2012:i:4:p:46-68
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    References listed on IDEAS

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    1. Kucherenko, S. & Rodriguez-Fernandez, M. & Pantelides, C. & Shah, N., 2009. "Monte Carlo evaluation of derivative-based global sensitivity measures," Reliability Engineering and System Safety, Elsevier, vol. 94(7), pages 1135-1148.
    2. Marco Ratto & Andrea Pagano, 2010. "Using recursive algorithms for the efficient identification of smoothing spline ANOVA models," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 94(4), pages 367-388, December.
    3. Kucherenko, Sergei & Feil, Balazs & Shah, Nilay & Mauntz, Wolfgang, 2011. "The identification of model effective dimensions using global sensitivity analysis," Reliability Engineering and System Safety, Elsevier, vol. 96(4), pages 440-449.
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    Cited by:

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    2. Arndt Claußen & Sebastian Löhr & Daniel Rösch, 2014. "An analytical approach for systematic risk sensitivity of structured finance products," Review of Derivatives Research, Springer, vol. 17(1), pages 1-37, April.

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